MEA PROJECT REPORT

Role of MSMEs in Indian Economy

SUBMITTED BY: GROUP 12

SUBMITTED TO: Abhishek Mukherjee (MBA19001)
Prof. Manas Paul Aman Agrawal (MBA19005)
Ankit Goel (MBA19007)
Deepansh Goyal (MBA19024)
Nikita Seth (MBA19047)
Nishant Singhal (MBA19050)
Contents
INTRODUCTION.....................................................................................................................3
Importance of MSME........................................................................................................4
Role of MSMEs...................................................................................................................4
GROWTH AND PERFORMANCE OF MSME SECTOR..................................................5
Growth in basic parameters of MSMEs over a decade...........................................6
CHALLENGES FACED BY MSME IN INDIA....................................................................7
IMPACT OF GST ON MSME..............................................................................................10
Negative Impact of GST.................................................................................................10
Positive Impact of GST..................................................................................................10
IMPACT OF DEMONETIZATION ON MSME..................................................................11
SURVEY ANALYSIS............................................................................................................12
RECOMMENDATIONS........................................................................................................13
REFERNCES.........................................................................................................................14
APPENDIX 1..........................................................................................................................15
 INTRODUCTION
The Micro, Small and Medium Enterprises (MSME) sector has emerged as a highly
vibrant and dynamic sector of the Indian economy over the last five decades.
The MSMED Act, 2006 defines the Micro, Small and Medium Enterprises based on the
investment in plant and machinery for those engaged in manufacturing or production,
processing or preservation of goods the investment in equipment for enterprises
engaged in providing or rendering of services.

Figure 1: MSME classification of manufacturing sector and service sector

The Indian MSME sector being the supporting pillar of the national economic structure
and has served as a strength for the Indian economy, providing the flexibility to cope
with global financial shocks and hardships. MSMEs contribute to service activities of
6.11% of GDP and 24.63% of GDP, as well as 33.4% of India's GDP and 63.4 million units
of the country's geographical expansion. They have the potential to employ around 120
million people and account for 45% of all exports from India. The region has
consistently maintained a growth rate of more than 10%. About 20% of MSMEs come
out of rural areas, which indicates the importance of these organizations in deploying a
substantial rural workforce in the MSME sector and in promoting sustainable and
comprehensive growth and generating large-scale employment, especially in rural
areas.
The main purpose of the sector is to provide employment and lower capital expenditure
through its contribution to industrial production and exports. The labor intensity of the
MSME sector is much higher than that of large corporations. With its agility and
dynamism, the region has shown admirable innovation and adaptability to survive the
recent economic downturn and recession. The region not only serves the urban market,
but also promotes the industrialization of rural and backward areas, reducing regional
imbalances and a more equitable distribution of national income and wealth.
Importance of MSME

MSMEs are expanding their domains into sectors of the economy, producing a wide
variety of products and services to meet the demand of domestic and global markets.
Micro, small and medium enterprises hold strategic importance based on production
(around 45% of manufacturing output), exports (about 40% of total exports) and
employment (about 69 million persons in more than 29 million units nationwide) as per
Planning Commission, 2012. It is seen worldwide that as incomes increase, the share of
the informal sector decreases, and the formal SME sector grows. During 2016-17, the
Share of MSME Gross Value Added (GVA) in total GVA was 31.8%.
As per Nitin Gadkari, the Union minister for MSME, “India is the fastest growing
economy and at the same time our Prime Minister's Vision of making India a USD 5
trillion economy and the role of MSMEs is equally important, ‘’ also informed that at
present MSME contributing 29 per cent in country's Gross Domestic Product (GDP) and
now the target is to take it to 50 percent. He also mentioned the following, “Exports’
contribution which currently stands at 50% from the sector will be increased to 75%
while employment generation will extend to 15 crore people from the MSME segment
as against 11.10 crore at present.”

Role of MSMEs

 To generate large scale employment

The MSME sector in India has grown significantly since 1960 - with an average annual
growth of4.4% in units and 4.62% in employment (currently employing more than 30
million). The MSMEs generates the most employment in per capita investment, also they
help in examining rural-urban migration by providing people living in isolated areas
with a sustainable source of employment.
Under the Prime Minister’s Employment Generation Programme (PMEGP,) the
estimated employment generated (number of persons) in micro enterprises during the
year 2018-19 is about 5.87 lakhs.
 To sustain economic growth and increase exports
Non-traditional products accounts for about 95% of MSME exports which is dominated
by exports of sporting goods, readymade garments, plastic products etc. MSMEs serve
as ancillary industries for large-scale industries providing them with raw materials,
critical components and backward linkages.
 Making Growth Inclusive
MSMEs are instruments of inclusive growth which touch upon the lives of the most
vulnerable and marginalized. Thus, instead of taking a welfare approach, this sector
seeks to empower people to break the cycle of poverty and deprivation. It focuses on
people’s skills and agency.
 GROWTH AND PERFORMANCE OF MSME SECTOR

The Micro, Small and Medium Enterprise have a significant role in the Country's GDP
and providing employment opportunities at a lower capital cost to rural and backward
areas. The expansion of MSMEs to various sectors such as Manufacturing, Trade, and
services provide them the opportunity to produce a diverse range of products and
services to meet the demand of domestic and global markets.

The contribution of MSME Sector in the country's Gross Value Added (GVA) and Gross
Domestic Product (GDP), at current prices for the last five years is as below:

MSME Share of Share of

Growth Total GVA Total GDP
Year GVA MSME in GVA MSME in
(%) (in Cr) (in Cr)
(in Cr) (%) GDP (%)
2011-12 2622574 - 8106946 32.35 8736329 30
2012-13 3020528 15.17 9202692 32.82 9944013 30.4
2013-14 3389922 12.23 10363153 32.71 11233522 30.2
2014-15 3704956 9.29 11504279 32.21 12467959 29.7
2015-16 4025595 8.65 12566646 32.03 13764037 29.2
2016-17 4405753 9.44 13841591 31.83 15253714 28.9
Figure 2: Contribution of MSMEs in the country's economy at the current price (Figures in Crores adjusted
for FISIM at Current prices) [1]

As per CII, MSMEs contribute about 6.11% in manufacturing GDP and 24.63% in Service
GDP of Country. MSME provides employment to almost 120 million people and
currently contributes around 45% of the overall exports of the Country.

As per the NSS 73rd Round Survey [ 2015-16] on MSMEs, the certain key results that can
be drawn out about a total number of MSMEs and the employment are

Estimated number of
Activity Share Employment (in lakh) Share
Enterprises (in lakh)
Category (%) (%)
Rural Urban Total Rural Urban Total
Manufacturing 114.14 82.5 196.65 31 186.56 173.86 360.41 32
Trade 108.71 121.64 230.35 36 160.64 226.54 387.18 35
Other Services 102 104.85 206.85 33 150.53 211.69 362.22 33
Electricity* 0.03 0.01 0.03 0 0.06 0.02 0.07 0
All 324.88 309 633.88 100 497.78 612.1 1109.89 100
Figure 3: Estimated No. Of Enterprises and employment in MSME Sector (Broad Category Wise)

The Micro sector has the maximum no. of enterprises with an estimated 630.52 lakh
that accounts for more than 99% of the total MSMEs in the country. The small and
medium enterprises are roughly 3.31 lakh and 0.05 lakh in number. The estimated
employment in micro, small and medium enterprises is equal to 97%, 2.8%, and 0.2%
respectively
Growth in basic parameters of MSMEs over a decade

The comparative analysis between Fourth All India MSME Census (2006-07) and NSS
73rd Round (2015-16) can tell about the growth of MSMEs in certain basic parameters
that have happened over a past decade

NSS 73rd Round, Fourth All India Census of MSMEs,

Parameter CAGR (%)
2015-16 2006-07
No. of MSMEs (Total) 633.88 361.76 6.43
Manufacturing 196.65 115 6.14
Services 437.23 246.76 6.56
Employment (Total) 1109.89 805.24 3.63
Manufacturing 360.42 320.03 1.33
Services 749.47 485.21 4.95
Figure: 4 Growth of MSMEs

The opening of new MSMEs serves as a critical factor to evaluate the successful
development of this sector in the economy. It depicts the favorable conditions for the
opening and growth of new enterprises in the economy and shows high morale among
the entrepreneurs in the macroeconomics of the economy. The registration of MSME
has seen a change after the introduction of the MSMED Act, 2006. Earlier, Small Scale
Industries (SSIs) used to register to the District Industries Sector (DIC). But after the
MSMES Act, 2006 implementation MSMEs had to file Entrepreneurship Memorandum
(Part -1) before starting the enterprise and then Entrepreneurship Memorandum (Part
-2) after the commencement of
production at DIC.

The preceding figure shows the number

of Entrepreneurship Memorandum (Part-
2) that has been filed during 2007-08 to
2014-15 under the various states/UT/
Commissionerates/Directorates of
Industries

Since September 2015, an online filing system

under Udyog Aadhar Memorandum (UAM) has
been started that is based on self-declaring
information. As of May 2019, 68.25 MSMEs have
already registered on UAM. The breakup of the
registration on UAM in sectors shows that almost
55% of filings are in the service sector in
comparison to 45% in the Manufacturing Sector.
As per the data of UAM, 90% filings have been
done by Microenterprise while the rest 10% is
approximately by Small Enterprise and Medium
being less than 0.5%.
 CHALLENGES FACED BY MSME IN INDIA

Absence of adequate and timely banking finance: Small businesses have lack of
access of credit and investors are also reluctant to invest in them as the risk is high.
Moreover, institutional capital whenever available requires collateral which in turn
makes these MSMEs owners to turn to these institutions in less number. Generally, the
larger capital institutions are conventionalized to provide access to capitals only when
the individuals firms are in healthy state not in turmoil or in the budding stage when the
future is unknown. Therefore, these small companies prefer to invest their own
resources or to lend credit from a friend or relative as these unlisted credit lenders are
easily available.

Lack of advanced technology: The technology used by MSMEs are generally outdated
and they are known to work with local resources only. They also have lack of
accessibility of Information Technology know how. As a result, it impacted their
efficiency and also results in substandard products and services. This resonates a deep
impact on competitiveness of these firms with bigger players.
As per the Nov 2019, Financial Express report, only 34% of Indian MSME adopted for
digital means in their day to day operations. In terms of adopting SaaS solutions, figure
dropped to just 7% out of 1,29,537 MSME respondents in a survey conducted by India
SME Forum. This shows that despite the increase of globalization and technology, small
firms are still struggling to adopt advanced technology, which is problematic for them to
sustain.

Survey Results for MSME adopting current technology

MSME

114000 116000 118000 120000 122000 124000 126000 128000 130000 132000

Organization adopting SaaS services

Organizations still using conventional means for day to day operations
Figure 5: Survey results of MSME adopting current technology

Ineffective marketing strategy: Small Industries also suffer due to incompetent

marketing and distribution strategies. They don’t have their own marketing and sales
department, neither they don’t have sufficient credit to outsource their marketing
operations. Moreover, most of the small entrepreneurs are unaware of the modern
marketing and business strategies. As a result, they are unable to cope quickly with
changing market scenarios. Though the products they produce has huge market
potential but they unable to opt for efficient marketing techniques. Consequently, they
limit themselves to local and neighbourhood areas. Even, lack of technology also
impacts their marketing.

Impact of GST: Initial GST returns and comprehensive requirements makes accounting
and compliance complicated and time consuming for MSMEs. Moreover, they also don’t
have enough resources and time to incorporate sudden changes which resulted in
failure of many MSME. As under the GST, the tax neutrality will not discriminate
between luxury goods and normal goods. Earlier, central government imposed higher
taxes on luxury goods and services. Under GST implementation, all goods and services
are required to pay the same tax which have widen the disparity between large and
small businesses. It is not an ideal situation for MSMEs competing against large
businesses.

Impact of Demonetisation: In India, most of the small businesses were heavily

dependent on cash transactions. For their working capital transactions or purchase of
raw material, they required cash. Demonetisation hit MSMEs severely. Many businesses
were closed due to lack of cash in the economy. Due to lack of money in the market, it
was very difficult for them to acquire credit timely and in adequate amount. This has
also resulted in NPAs for public sector banks as many MSME firms didn’t have enough
amount of cash to repay their loans.
INITIATIVES TAKEN BY GOVERNMENT

Some of the initiatives taken by the government for the development of MSMEs are:

1. Credit linked Capital Subsidy Scheme (CLCSS): CLCSS was introduced by the
Ministry of MSME to upgrade the plant and machinery of MSEs with state-of-art
technology by providing an upfront capital subsidy of 15% on institutional credit up
to Rs 1 crore for MSMEs in the specified 51 sub-sectors. During 2018-19, this
scheme benefited 2118 SC/ST MSMEs for participating in 141 domestic exhibitions
and 141 SC/ST MSMEs for participating in foreign exhibitions.

2. Micro and Small Enterprises – Cluster Development Programme (MSE-CDP):

MSE-CDP introduced by the Ministry of MSME to increase the productivity,
competitiveness and capacity of MSMEs in the country. The objective of the
programme is to support the sustainability and growth of MSMEs by addressing
common issues such as improvement of technology, skill, market access, access to
capital and other related aspects. The main focus of this scheme takes supportive
action by forming self-help groups and setting up Common Facility Centre for
testing, training, complementing production processes and related manufacturing
and procurement-related task.

3. Procurement and Marketing Support Scheme: This scheme was introduced by

Ministry of MSME to promote and educate MSMEs about GeM portal, public
procurement policy, online trade, trade fairs, digital marketing, GST and other online
services by organising trade fair and awareness programme. The objective of this
scheme is to promote new market access by organising or participating in National
or international trade fair, educate MSMEs about the importance and method of
packaging and marketing, import and export policies and procurement and latest
procurement techniques.

4. Credit Guarantee Scheme: The idea behind this scheme is to provide loans to
MSME without any third-party involvement. To strengthen the credit delivery
system and facilitate proper credit flow in the MSMEs, GOI and SIDBI set up the
Credit Guarantee Fund Trust for MSMEs. Under this scheme, the guarantee covers
available to the extent of 50%/ 75%/ 80%& 85% of the sanctioned amount of credit
facility. For micro-enterprises, the guarantee cover is 80% for credit up to 5 lakh and
for 50% for micro-enterprises for credit from 10 lakh to 100 lakhs per MSE
borrower for retail credit activity.

5. National Manufacturing Competitiveness Program: The National Manufacturing

programme is launched by the Government of India to improve global
competitiveness among Indian MSMEs. The NMCP initiative focuses on schemes
related to promotion of information and communication technology, mini-tool
rooms, design clinic and marketing support for SMEs. The main objectives of this
initiative are to focus on survival of MSMEs in domestic and international markets,
implementation with Public-Private Partnership and execution of challenges of
MSMEs.
 IMPACT OF GST ON MSME
Goods and Services Tax (GST) left a significant impact on the Micro, Small and
Medium Enterprises. As most MSMEs operate in an informal sector, so the advent
of GST brought a fresh wave of new challenges for them. Apart from the
challenges, this new taxation system made the job easier for business owners.

Negative Impact of GST

Exemption Limit: When GST was implemented, exemption limit for MSME from
payment of Goods and Services Tax (GST) was reduced to 20 lakh. This reduction
significantly impacted the operations of MSME.
Recently, GST council has increased this limit from 20 lakh to 40 lakh, which can
be termed as a massive relief for small businesses.
Multiple Returns and Compliance Cost: Initial comprehensive requirements
and GST returns filing makes the process complicated for the MSMEs which has
increased their compliance cost and time.
Declining Sales Volume: Various systematic issues led to the decline of sales
volume for MSMEs. Because of the high transaction costs and delays during the
GST implementation period most of the small and vulnerable businesses saw a
demand downturn due to which their sales came down.
Lack of Infrastructure: As most of the MSMEs operate in an informal sector
which lacks the proper infrastructure and technology to adapt to the changes
brought in after the implementation of GST. It has increased documentation for
the businesses which has directly or indirectly impacted their performance.

Positive Impact of GST

Formalization: The formalization of process will bring in more visibility and

transparency and hence more opportunities for MSMEs. GST registration will also
increase the credit uptake of MSMEs.
One Tax System: Earlier there were different taxes like excise, service tax etc.
Every state has its own tax. Now all of these taxes have been boiled down to a one
tax which is GST, which has made the system much easier to use. Hence increase
the efficiency and performance of MSMEs.
Access to Large Markets: With the implementation of GST, MSMEs now have
access to larger markets as the requirement for interstate movement have been
eliminated. MSMEs can expand their reach across borders and can go anywhere in
India.
Easier Starting Up: With much lesser complexity and the standardization of
process, starting up has become much simpler.
 IMPACT OF DEMONETIZATION ON MSME
On 8th November 2016, Indian Government announced the demonetization of all
Rs500 and Rs1000 banknotes which impacted Micro, Small and Medium
Enterprises severely.

Cash Crunch: After Demonetization, 86% of the cash in the system was
withdrawn without any prior knowledge and no other alternative. This sudden
withdrawal of cash from the system had significantly affected the MSMEs.
Majority of transactions of MSMEs are on cash, but as the system was bereft of
liquidity enterprises left with no option but to face income losses. MSMEs which
operate in unorganized/informal sector were mostly affected.

Impact on Operations: Many MSMEs stopped their operations for significant

period of time as they were not able to source raw materials, pay their workers
because of cash crunch in the economy. The market lacked the sufficient currency
which is required for smooth functioning of small enterprises. Some MSMEs even
end up closing down due to the demonetization.

Impact on Employment: Demonetization has negatively impacted the

employment in the economy. Post demonetization many people lost their jobs
because the organizations in which they were working were reporting losses and
finally closed their operations. MSMEs operating in Infrastructure sector reported
approximately 35% of the job reduction while the industries operating in export
related activities reported 30% job losses.
 SURVEY ANALYSIS
We conducted the primary research in various parts of the Kashipur to gather the
primary data about the MSMEs and also the impact of demonetization and GST on
these local MSMEs. Some of the key point that were highlighted by these MSMEs are:

 Most of the MSMEs are either unaware or do not have proper information about
the prevailing government scheme that are for their development. The lack of
awareness exists due to no proper medium present to aware the MSMEs in small
cities.
 These MSMEs also faces the payment issues from their customers i.e. the other
industries. Such delay hampers their cash flow cycle that ultimately results in fall
of production.
 MSMEs also faces the challenge of poor leadership and management failure
because of no formal structure existing in them.
 During demonetisation, cash purchases of the MSMEs were affected that resulted
in inventory stock up and hamper in the cash flow cycle. Also, since most MSMEs
operations and activities were majorly cash based. Therefore, they faced the
challenges of paying wages to their labours, making purchases etc.
 GST and demonetisation also made difficult for the MSMEs to avail loans from
the Bank, as Bank were reluctant to give loans due to financial security issues.
 Implication of GST also resulted in hiring of skilled workers such as CA,
computer worker etc. This resulted in additional financial burden on the MSMEs.
 Some MSMEs claimed that technology, constant upgradation and skill building
was not a major issue for them.
 One positive aspect of GST implication that MSMEs gave was the reduction in the
fraudulent activities that happened.
 RECOMMENDATIONS

The challenges faced by the MSME sector is a major struggle for the government as well.
A sector that constitutes almost 30% to the GDP of the country, provides employment to
roughly 120 million people, constitutes a large part in rural part of the country and
produces more than 6000 products daily to aid the domestic, as well as global demand,
needs to be looked at to counter the challenges and provide a solution to them.

Some of the initiatives that can be taken to improve the condition of MSMEs are

1.) Digital Marketing Programs: One of the major challenges that MSMEs faces is
the lack of an effective marketing strategy. With the boom in digitization, the
Government can start a digital marketing program for the MSMEs where they
can train them in digital marketing and provide financial assistance for running
the digital campaigns for their products and services.

2.) Easy Credit facility and access to working Capital: With limited cash in hand,
the MSMEs struggles to run its operations. Certain schemes such as Udyami
Mitra Portal and CLCSS are them to provide financial support, but the limited
budget allocated to these schemes cannot fulfill the credit requirement of the
sector. Therefore, the Government should form a Credit Bureau to improve
credit reporting schemes as it may result in lower credit costs to firms and lower
collateral to loan value. Also, stringent financial laws and regulations encourage
a favorable credit environment.

3.) Linking MSMEs with Large Industries: Outdated and old technology put a
barrier on the MSME growth. With not so modern technology equipment, the
MSME fails to optimize and improve its processes. Integrating MSMEs with large
industries will not only help MSMEs in technological up-gradation but also, they
can learn the efficient processes of lean manufacturing and six sigma to enhance
their manufacturing competitiveness.

4.) Infrastructure Development: A need for up-gradation of infrastructure utilities

such as electricity, road, water, etc. is required for any enterprise to run its
operations smoothly.

5.) Digital Assistance Programs: Digital India is one of the campaigns by the
recent government to improve online infrastructure and provide better internet
facility in the country, but lacks the motive of making digitally aware people.
Since MSMEs are being pushed to incorporate digital platforms, they lack
sufficient knowledge for it. Digital Assistance Programs will help in imparting
digital knowledge as well can be useful to enhance the skills of the workforce and
facilitate innovation in the businesses.
 REFERNCES
 MSME ANNUAL REPORT | https://msme.gov.in/sites/default/files/Annualrprt.pdf
 Entrepreneurs memorandum (Part -ii) data on MSME sector |
http://dcmsme.gov.in/publications/EMII-2014-15.pdf
 One year of MSME and its impact on the MSME Sector (Alok Patnia, Oct 2018) |
https://yourstory.com/smbstory/one-year-of-gst-and-its-impact-on-the-msme-sector
 Impact of GST on MSMEs (Confederation of Indian Indusrty) |
http://www.dcmsme.gov.in/CII.pdf
 Impact of demonetisation in INDIA in MEME (Shweta Chaudhary) |
https://www.researchgate.net/publication/333695892_Impact_of_Demonetization_in_
India_on_MSME
 MSME worst hit by GST, Demonetisation, says RBI study |
https://www.business-standard.com/article/news-ani/msme-worst-hit-by-gst-
demonetisation-says-rbi-study-118081800287_1.html
 Demonetisation led to decline in MSME sector, GST dented exports: RBI study |
https://www.hindustantimes.com/business-news/demonetisation-led-to-decline-in-
msme-sector-gst-dented-exports-rbi-study/story-klZQNICyRITAsHztJmrp9L.html
 Indian MSMEs struggle for technology adoption continues; poor digital
understanding restricting growth|
https://www.financialexpress.com/industry/sme/msme-tech-small-business-
technology-msme-cloud-adoption-digital-technology-india-sme-forum-intel-
india/1770091/
 Impact of Make in India initiative for the MSME sector |
https://lendingwa.la/impact-of-make-in-india-initiative-for-the-msme-sector/
 International MSME Day 2019: Finding Solutions to MSME Challenges |
https://medium.com/mojoverse-the-business-weekly/international-msme-day-
2019-finding-solutions-to-msme-challenges-fc69187da172
 Breaking barriers in MSMEs scaling-up – some learnings from the world |
https://yourstory.com/smbstory/opinion-msme-barriers-scaling-up


 APPENDIX 1

Primary Research Questions

Ques 1. What were the difficulties in day-to-day business activities of small business
after demonetisation?

Ques2. What were the challenges businesses face in payment of prices of small
products? Was shift to modern technology like using Paytm, POS machines easier?

Ques3. Does ineffective marketing strategy affect their business and create difficulties in
competing with other larger players?

Ques4. Are they aware of schemes run by the government to promote MSME in our
country? If yes, then what all schemes they have leveraged?

Ques5. Does limited capital and technical knowledge is an impediment for them?

Ques6. What are the impacts of GST on day to day business operations?

Ques7. Is comprehensive requirements to calculate GST has increased their compliance

cost and time?

Ques8. To what extent level of education affect the performance of MSME?

Ques9. How do domestic commitments influence performance of MSME owned by

woman?